Long-term debt is a closely monitored item on a public company's balance sheet when earnings reports are announced. Long-term debt is a sign of how much leverage a company is using to operate its business. Business Dictionary defines long-term debt as the "amount owed for a period exceeding 12 months from the date of the balance sheet." Effectively used, debt funds have advantages, but investors seldom see long-term debt as a benefit.
Financial Health Perception
One simple intangible benefit of having no or low long-term debt is simply the public perception that your company is in relatively good financial health, notes Spireframe Software in its "Long Term Debt" overview. Significant long-term debt is worrisome to potential investors in your company and can restrict your share price's upward mobility. Additionally, employees and other stakeholders in your company may have concerns about your company being overly leveraged.
"Increased debt brings with it higher fixed costs that must be paid in good times and bad, and can severely limit a company's flexibility," reports the Encyclopedia of Business (2nd Ed.). Though low-cost debt can make for a good investment, companies with no long-term debt do not have to worry about paying off long-term debt when times are tough. During recessions or down times for a particular business, a tremendous advantage for companies is not having to make large principal and interest payments on debt.
Worrying about making regular long-term debt payments serves as a major distraction for company leaders. When company executives are not concerned with coming up with funds to make monthly or quarterly long-term debt payments, they have more time to focus on business operations, notes the Encyclopedia of Business. They also can find ways to invest capital in strengthening or growing the business.
Companies that do not currently have long-term debt have the capacity to acquire capital funds from investors or take on debt when necessary. Capital investors are more willing to invest in companies not heavily leveraged. Plus, when you do not possess high long-term debt, you have more ability to issue bonds or to acquire long-term loans.
- debt defined image by Christopher Walker from Fotolia.com